If there is one thing we can all agree on it is that the global pandemic completely threatened the way we lived. No one prepared for the menace that COVID-19 caused. Businesses and corporate organizations were forced to adapt to emerging measures in place to stay afloat. Other businesses, grappled with the reality of the lockdown protocols, had to shut down operations. But options did arise to help businesses like low-interest or forgiven business loans and the Employee Retention Credit (ERC).
However, with the breakthrough of the COVID vaccine, businesses (small and large) can now bounce back to action. Throughout this process payroll tax credits were available to help businesses. The Paycheck Protection Program (PPP) loan is one of such packages. This loan, intended to help small businesses with 500 or fewer employees, features a streamlined application process, requires no collateral, and can be forgiven.
The reality is this not all businesses will be approved. A lot of business owners had their hopes dashed after their application was denied.
Yet, there is still hope. The Employee Retention Credit is another initiative that your business can benefit from.
In this article, we will explore what the Employee Retention Credit is and if you may be eligible for it.
What is the Employee Retention Credit?
The Employee Retention Credit is a relief from the CARES Act meant to aid small businesses. This credit is a refundable tax credit that employers can claim, as long as they are able to keep their employees on the payroll.
The credit is also expanded in the Consolidated Appropriations Act (CAA) from December 2020.
How much exactly is the ERC?
The Employee Retention Credit is 50% of the wages that employers, that are eligible, pay their workers between March 13th to December 31st, 2020. Eligible employers can get access to these funds by reducing their employment tax deposits they are expected to make. There is a high chance that you may be eligible for the credit.
Now, because of the CAA, employers who are eligible for the 2021 credit can claim up to 70% of wages paid from January to June 30th, 2021. Which was then extended to September 30th, 2021.
If, for instance, you pay a worker $10,000 for Quarter 4 (October to December 2020), you would get a credit of 50% which is $5,000. If you are making claims for Q1 of 2021, due to the CAA regulations, you get 70% which is $7,000.
No matter the number of employees working for your business, you get to claim 50% (for 2020) or 70% (for 2021) credit on each of them.
This brings us to the next point:
What Classifies as Qualified Wages to be Eligible for the ERC?
A better understanding of what classifies as qualified wages will reveal if you are eligible for the ERC:
These ‘qualified wages’ are the compensations and salaries paid to employees for the period under review (March – December 2020). This also includes health plan expenses. Another factor that determines qualified wages is the number of full-time employees you employed in 2019.
If your business has less than 100 full-time employees workers in 2019, you are eligible to claim the ERC on all the wages paid to your employees during the lockdown period.
The CAA also made a few adjustments to this and increased the threshold from 100 to 500 full-time employees. So, employers with a workforce of 500 full-time workers in 2019 can claim the credit. Even if your employees were working during the lockdown period, you still have strong claims to the credit.
Which Employers Qualify for the Credit?
To get access to the Employee Retention Credit, you must meet the eligibility status. They are as follows:
- If your business suspended activities as a result of the lockdown protocols in place, either partially or completely.
- If your business faced a decline in sales and gross receipts due to the pandemic.
Note that self-employed persons cannot claim the credit for their own services and/or earnings.
How do you Claim the Employee Retention Credit?
First of all, there isn’t any application you fill to get access to the credit. You, as an employer, would have to claim the credit on your federal employment tax returns. This involves claiming the credits that are on Form 941 of the Employer’s Quarterly Federal Tax Returns.
You can adjust your Form 941 if you have confirmed that you are eligible for the credit.
Looking at the nature of your business, you can even claim the credit on Form 943 of the Employer’s Annual Federal Tax Return for Agricultural Employees or Form 944 of the Employer’s Annual Federal Tax Return.
Your business can bounce back from all the menace the pandemic created. And Expense To Profit is just the financial companion you need to make it a reality. Contact us today to discuss and see if you qualify.
Published by Marc Freedman
Marc currently serves as our Chief Cost Evaluator, expertly advising our client management team on how to help you successfully achieve your business and financial growth goals. A respected mentor to all he consults with, he is an avid collaborator and contributor to the spend consultant community, guiding thought leaders to formulate, design, and install the best operational solutions available to their clients.